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This chapter is not exhaustive and is limited to broadly outline the tax consequences of the main events occurring when doing business in France. It does not constitute a tax advice or a client - attorney relationship. Materials are not suitable for tax analysis. Visitors are invited to consult a tax lawyer before taking any decision.
 Partial transfer of assets "APA"
Simplified Merger
Incorporation of a holding company
Merger
Reorganization of a tax consolidated company
Division
Change of the form of the business organization
EU merger directive (Transfer of the registered office)
IMPORTANT: Directive 2005/19/CE dated February 17, 2005 which modified the merger directive, introduced several modifications which most will apply as of January 1st, 2007. French tax rules applicable to reorganization do not comply with some of these modifications. The application of the new directive will therefore open new opportunities to French companies (Obligation to keep the shares received in a partial transfer of assets, tax free incorporation of a Permanent Establishment by a foreign company, softening of the definition of share of share exchanges, transfer of registered offices of European companies).
As of January 1st, 2005 the transfers between related companies and the reverse mergers (The shareholder(s) of the absorbed company control the surviving entity after the merger) between unrelated company must be accounted at net book value.
The mergers (Shareholders of the absorbing entity keep the control of the absorbing entity after the merger), divisions and spin-offs between third parties must be accounted at current-value.
French tax authorities guideline concerning the tax treatment of reorganizations as of January 1st, 2005deeply modified , the accounting treatment . The administrative guideline acknowledges the new mandatory accounting rules for valuation of contributed assets (Reference to control of merged companies and surviving entity).
Guideline stipulates mainly rules applicable to the removal of ceilings related to transfer of losses for tax free reorganizations, rules applicable to non deductibility of net assets transferred in case of simplified merger or Transmission Universelle du Patrimoine "TUP", and also rules applicable to the non deductibility of costs generated by the depreciation or right-off of "mali technique"* when tax free merger rules apply.
* Net value of shares of the absorbed company in the book of the absorbing entity higher than the net book value of the contributed assets.
PRIOR RULES:
Until December 31. 2004, French statutory accounting rules allowed to freely choose to value the assets transferred in a merger, division or spin-off at current-value or at net book value.
However the French tax authorities considered that the assets must be transferred at current value. They accepted the accounting of assets at net book value when the transfer benefits of the preferential regime (art. 210A CGI).
 Partial transfer of assets "APA"
A partial transfer of assets, or "PTA", is a transaction whereby company A transfers part of its assets to a new or existing company B, which may be French or foreign (Cross border reorganization).In return for this contribution, B receives shares from A and, if necessary, cash up to a maximum of 10% of the nominal value of the shares received. A PTA does not mean that A or B ceases to exist.
PTAs make it possible to affiliate an activity, to combine identical or complementary activities or even to merge competing companies' activities.
According to standard tax rules, the PTA is considered for tax purposes as a sale of assets followed by a transfer to the receiving company (taxation of appreciation, credit balances and reserves - registration fee, capital duty and/or distribution fee).
To avoid these very heavy tax cost, companies subject to corporate tax that are transferring a complete field of activity may opt for the tax free reorganization rules, as far as corporate tax and/or registration fees are concerned.
A complete, autonomous branch of activity means a set of assets and liabilities which can operate independently or also a shareholding of 30% to 50%, and in some cases even less, in the capital of a company that is subject to corporate tax.
If the transfer does not involve a complete, autonomous field of activity or if there is some doubt, a company may ask to benefit from the special taxation system under the terms of a prior "Ruling".
Under a prior ruling "Ruling", a partial transfer of assets may be made to a foreign company. A transfer from a foreign company to a French company may also require an approval in certain circumstances.
A prerequisite to benefit of the tax free regime is that the transferring company undertakes to keep for 3 years the shares received in payment for the transfer and, if necessary, to calculate the appreciation resulting from the transfer of these shares in relation to the transferred assets' tax value in its own books.
If the transfer benefit of the tax free reorganization rules, the net transfer appreciation, the credit balances and the reserves transferred are not taxable. Shares for shares transfer are only liable to a fixed registration fee of 230 euros.
A prior ruling "Ruling" is necessary to transfer losses. Any "carry back" receivable is transferred automatically.
Subject to a prior ruling, it is also possible to allocate free of charge, the shares received from the company benefiting of the transfers to the shareholders of the transferring company, within one year of the date of transfer. According to an administrative guideline (13 D-1-03), the French tax authorities indicated that these rules may also benefit to a partial transfer of assets between foreign companies followed by a distribution to French resident shareholders However no ruling will be granted for partial transfer of assets resulting in a separation of the business activity from the business estate.
French tax authorities issued additional guidelines 13 D-1-06 introducing more flexibility in the allocation of shares to the shareholders of the transferring entity within one year of the date of transfer of a complete branch of activity made according to the favorable tax regime rules.
According to article 115-2 of the French tax code « CGI », such transfer is not considered as taxable distribution of income when the transferring company gets a prior approval of the French tax authorities. This approval is granted when the 3 following tests are cumulatively met:
- Transaction eligible under French favorable reorganization regime of art. 210 A CGI
- Valid economic justification
- Main objective is not tax fraud or tax evasion
Tax authorities also request that determined shareholders of the transferring entity commit to hold the shares for at least 3 years.
The new guidelines give more flexibility and provide additional exceptions to the 3 years holding requirement.
In some circumstances it is possible to carry out a partial transfer of assets retrospectively.
- The special taxation system is granted only if several conditions are satisfied (statement and register for monitoring appreciation, progressive reintegration of appreciation into depreciable assets etc.). A partial transfer of assets carries a certain number of consequences, obligations and opportunities with regard to VAT, business tax, income tax, miscellaneous taxes and employee shareholding.
Guidelines 3 A-6-06 about the VAT exemption apply to delivery of goods and services between VAT taxpayers occurring in case of transfer for cash, for no consideration or share of share transfer of a business, or a branch of a business, applicable as of January 1st, 2006.
This new VAT exemption applies to delivery of goods, supply of services, transaction VAT taxable on margin and transaction dependent of real estate VAT.
According to article 210 B CGI, when a company sells the shares received in remuneration of the transfer of an ongoing business benefiting of the tax free regime, the related gain and reserves become taxable.
In a decision dated July 13, 2007, the French Supreme administrative court judged that the capital gain and the reserves are taxable the year of the sale of the shares, at the rate applicable to this Fiscal Year, and not, as claimed by the French tax authorities, the year of the contribution, at the tax rate applicable to this year.
This decision is favourable because of the decrease of the CIT rate and because of the exemption of the capital gain on participating shares.
Simplified Merger
A simplified merger is a transaction whereby 2 or more companies, for example, B, C and D, merge into company A which formerly held 100% of B, C and D's capital. When the merger is complete, B, C and D are absorbed into A, which is the only surviving company.
Since 1st January 2002, dissolving companies by merging net assets has been treated as a merger "Merger".
In principle, mergers of net assets may be completed in 30 days, as opposed to a minimum of 2 to 3 months for mergers.
On July 7, 2003, French tax authorities issued guideline 4 I-1-03 stating that benefit of the special tax regime for corporate income tax and distribution tax is subject to a formal option and a written commitment to fulfill the engagements existing for mergers in the resolution of dissolution. The guideline also indicates that simplified mergers may have a retroactive effect to the opening day of the tax year in progress on the date the simplified merger is decided. The effect of simplified mergers may also be delayed until the end of the period of opposition of creditors (30 days). Companies have until October 7, 2003 to regularize any prior simplified mergers which would not comply yet with the new regulations.
As of January 1st, 2005 book losses equal to the excess of the liabilities over the net asset are not tax deductible for simplified mergers or mergers with a 100% subsidiary (Favorable tax regime and regular tax regime). In addition when the favorable tax regime applies to a merger, losses resulting from the right-off of the shares of the merged entity are not tax deductible.
Incorporation of a holding company
Indirect holding of company through a holding company may permit to leverage an acquisition or an existing business from a tax stand point (Tax consolidation), from a corporate law stand point (Control with less than 50%) and from profitability view point (Optimal debt/equity ration).
Before proceeding to such reorganization, French individual shareholders should check the wealth tax consequences "ISF".
Merger
One or more absorbed companies, for example B, C and D, transfer on their dissolution without liquidation, their entire net assets to a new company A, the absorbing entity. A is the only surviving entity.
The surviving entity may also be an existing entity, B for example. B will be the only surviving entity.
A merger is used to regroup several businesses in the same company. A merger of SA, SAS and SARL takes at least 2-3 months and require an external auditor, a merger agreement, an approval of the merger by an extraordinary shareholder meeting and audited account not older than 3 months. Under regular French tax rules, a merger is treated as a dissolution with liquidation of the absorbed companies. If not priory taxed, profits, reserves and capital gain of the absorbed companies are taxable at the date of the merger.
The absorbing entity must pay registration duties on the taxable assets (e.g. goodwill) received from the absorbed companies. The shareholders of the absorbed entities pay income tax on the shares of the absorbing entities received in exchange of their shares in the absorbed entities.
Permanent tax breaks are available to avoid these tax effects for qualifying transactions. The special tax regime applies only to mergers between companies liable to corporate income tax.
In order to qualify, the surviving entity must absorb all the assets and liabilities of the absorbed entities. In addition the consideration given in exchange for the transfer of assets must take the form of shares. Cash payment must not exceed 10% of the nominal value of the shares received.
Subject to a prior ruling "Ruling" it is possible to merge with a foreign entity. When the special tax regime applies, the net capital gains arising on the transfer of capital assets are not immediately liable to corporation tax if the gain realized on depreciable assets is restored to the taxable profits of the absorbing company on a staggered basis. No liability to corporate tax arises on any gain realized by the absorbing company on the cancellation of its own shares in the absorbed company. Likewise the reserves of the absorbed companies , if still justified, are not liable for immediate taxation. The transfer duty paid for by shareholders are only liable to a fixed registration fee "Facts and figures" of 230 euros.
As of January 1st, 2005 accumulated tax losses are transferred to the absorbing entity without limitation.
As of January 1st, 2005 book losses equal to the excess of the liabilities over the net asset are not tax deductible for simplified mergers or mergers with a 100% subsidiary (Favorable tax regime and regular tax regime). In addition when the favorable tax regime applies to a merger, losses resulting from the write-off of the shares of the merged entity are not tax deductible.
Loss carry-back receivable is automatically transferred at nominal value.
The allotment of shares to shareholders of the divided company in consideration of assets transferred is not deemed to be a taxable distribution of securities income. As a result it is not taxable. Capital gains will only be taxable in the event of a subsequent sale of the new shares. It is possible to merge with retroactive effect.
To benefit from the special regime, the absorbing company must covenant in the merger agreement to respect several conditions (Specific schedule attached to its annual tax return, keep an on-going register of capital gains on non depreciable assets, restore the net capital gains arising on the contribution of depreciable assets to its profits on a staggered basis, etc..) A merger triggers many consequences, requirements and opportunities for VAT, business tax, salary taxes, miscellaneous taxes and employee profit sharing plan.
Reorganization of a tax consolidated company
Mergers "Merger" , divisions "Divisions" and partial transfer of assets "Partial transfer of assets" between companies belonging to the same tax consolidation "Tax consolidation" may benefit of the tax consolidation rules. In some cases the transfer of the carry-forward losses may be facilitated by the tax consolidation rules.
In some cases the transfer of the carry-forward losses may be facilitated by the tax consolidation rules
Division
A division is a transaction whereby a company A transfers, on its dissolution without liquidation, its entire assets and liabilities to two or more existing companies or new companies, for example B and C. Under regular French tax rules, a division is treated as a dissolution with liquidation of the divided company. If not priory taxed, profits, reserves and capital gain of the absorbed companies are taxable at the date of the division. The registration duties on dissolution "Facts and figures" are payable. The shareholders of the divided entities pay income tax on the gain realized on the liquidation of the company.
Permanent tax breaks are available to avoid these tax effects for qualifying transactions. The special tax regime applies for income tax and/or registration duties only if the divided company has at least two complete branches of activity and if each of the receiving company receives at least one complete branch. A complete branch of activities is a pool of employees, asset and liability able to perform a business by itself.
In addition the shareholders of the divided company which hold at least 5% of the voting right of the divided company (0,1% for the shareholders involved in the decision to divide the company) and which hold together at least 20% of the share capital of the divided company must commit themselves to retain those shares for at least 3 years.
When the divided company has not at least 2 complete branches of activities, or if there is a doubt about the existence of at least 2 branches, it is possible to seek a prior ruling "Ruling" from the French tax authorities When the special tax regime applies the net capital gains arising on the division are not immediately liable to corporation tax if the gain realized on depreciable assets is restored to the taxable profits of the receiving company on a staggered basis. The reserves of the absorbed companies, if still justified, are not liable for immediate taxation. The transfers paid for by shares are only liable to a fixed registration fee "Facts and figures" of 230 euros. Subject to a prior ruling "Ruling", ordinary losses subject to a 5-years carry-forward limitation and tax losses which can be carried forward indefinitely may be transferred to the receiving companies.
Loss carry-back receivable is automatically transferred at nominal value. The allotment of shares to shareholders of the divided company in consideration of assets transferred is not deemed to be a taxable distribution of securities income. As a result it is not taxable.
Capital gains will only be taxable in the event of a subsequent sale of the new shares. It is possible to divide a company with retroactive effect. To benefit form the special regime, the receiving companies must covenant in the division agreement to respect several conditions ( Specific schedule attached to its annual tax return, keep an on-going register of capital gains on non depreciable assets, restore the net capital gains arising on the contribution of depreciable assets to its profits on a staggered basis, etc.).
A division carries many consequences, requirements and opportunities for VAT, business tax, salary taxes, miscellaneous taxes, and employee profit sharing plan.
Change of the form of the business organization
The change of the form of a business organization is the transformation of the legal structure used to operate a business e.g. conversion of a "Company in to a partnership or the other way around.
The tax consequences will vary significantly whether the conversion is treated or not as the creation of a new corporate entity, whether or not the business activity is considered as different before and after the conversion and/or if the conversion request the application of a new set of tax rules e.g. personal income tax rules instead of corporate tax rules or the opposite.
Depending the answer to the questions above, the conversion may trigger the tax consequences of a dissolution or have tax consequences limited to registration duties and/or income tax.
EU merger directive (Transfer of the registered office)
On December 7, 2004, the Council of Ministers for Economic and Financial Affairs “ECOFIN” agreed to propose to amend the EC Merger Directive. Main proposed changes include the extension of the directive to the Sociétas Europaea “SE”, European Cooperative Society “ECS”, associations with commercial activities, certain cooperatives and non-capital based companies, mutual companies, funds and savings banks.
ECOFIN also proposed to exempt from tax the capital gains derived from the transfer of the registered office of a SE, or an ECS, from one EU member state to an other one. In addition the Directive will be also extended to cover "partial division" under which an existing company transfers one or more of its branches of activity to an existing or newly created sister company.
Last the tax deferral regime that applies to the conversion of a foreign branch into a subsidiary will be clarified.
Transfer of the registered office to another EU member country
For fiscal years finishing on December 31, 2004 or later, the transfer of the registered office of a company from one EU member country to another one is no longer treated as a liquidation of the company. As a result, the only gains taxed the date of the transfer will relate to the assets sold or physically transferred to the new EU member country. The interim profit and the gains benefiting from a differed taxation will not be immediately taxable. This transfer should be also neutral for French tax consolidation. (Altexis considers that any prior tax assessment should be successfully challenged).
EU Cross border mergers – Small and Medium-sized Enterprises "SME"
Directive on cross-border mergers of limited liability companies was published on November 25, 2005. It is a complement to the Statute for European Company. This Directive identifies the law applicable to cross-border mergers of EU limited liability companies. In particular it applies to SMEs with capitalization lower than what is required for the European Company and which do not operate in all EU members' countries. Last, this Directive will permit the practical application of the tax directive on tax neutral cross border mergers EU Member States must implement the Directive into their own domestic law by December 15, 2007.
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